Thursday, January 18, 2007

Nothing is New Under the Sun

A lot of neoclassical textbooks echo ideas developed by J. R. Hicks. I believe Shove's criticisms are still applicable to mainstream teaching.

"The central thesis is this: that if wage-rates generally are forced above 'the competitive level' (whatever exactly that may be), unemployment will be caused in two ways: (i) by the 'tendency for capital to shift from the less capitalistic to the more capitalistic trades' (and methods) ..., i.e. to 'those which use a relatively large proportion of capital to labour in making a unit of product' ..., from those which use a relatively small proportion; (ii) because 'the total supply of capital' will be diminished ..., since capital will be 'lost' ..., 'eaten into' ..., 'consumed' ..., 'destroyed' ..., 'cut into' ..., 'dissipated' ... or 'decumulated', and 'savings' therefore checked ... Unfortunately, 'capital' is not defined and we are not told how quantities of it (or indeed of labour) are to be measured, and similarly of 'saving'. Presumably, these are 'matters which properly belong to the theory of capital' ... But until they are cleared up it is impossible to follow Mr. Hicks's reasoning; and surely a theory of wages may not unreasonably be expected to include a precise and intelligible explanation of the processes through which wage-rates influence employment. For instance, it is not immediately apparent why employment should be diminished in the first of the two ways above distinguished...

...Again, Mr. Hicks excludes from consideration the monetary reactions of wage-policy. He recognises that 'the kind of processes we have been examining would itself have reactions on the monetary machine; and these would have further repercussions on the "real" process' ... 'But', he continues, 'perhaps the writer will be excused if he decides that, for the present, these repercussions lie outside the Theory of Wages' on the grounds that there is no general agreement among economists about the character of the reactions. But it is not possible to separate 'the real process' from 'its monetary reactions' in this way when we are dealing with all-round changes in wage-rates - even if it be possible when we are concerned with changes in a single occupation playing a small part in the total activity of the community. For in a monetary economy it is through the monetary mechanism that the effects of such a change are brought about, and their nature cannot be discovered or understood without a clear analysis of that mechanism: the monetary reactions, in fact, are not simply 'repercussions of' the process set up by the change, they are the process and must occupy a central position in the analysis of it. The only way to get rid of them is to postulate a barter-economy; and this Mr. Hicks does not do - his discussion hovers between what would happen in a barter economy and what does happen in a money-economy. He seems, for example, to suppose that monetary disturbances may be neglected if the wages fixed are supposed to be 'real wages' in the sense of 'money wages corrected for movements in the price-level of consumption goods' by means of 'cost of living sliding-scales' ... - which is manifestly untrue.

Thus, the obscurity and lack of precision which mar these chapters spring, I believe, from the attempt to narrow down the theory of wages by excluding from it any discussion, first, of the nature of capital and processes governing its supply, and, secondly, of the monetary reactions set up by changes, or disequilibria, in wage-rates." -- G. F. Shove, (1933). "Review of Hicks's The Theory of Wages, Economic Journal